10-Q 1 tenq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 _____________________________ FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to____________ Commission file number 1-14364 Acadiana Bancshares, Inc. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Louisiana 72-1317124 -------------------------------------------------------------------------------- (State or Other Jurisdiction I.R.S. Employer of Incorporation or Organization) Identification No.) 200 West Congress Street Lafayette, Louisiana 70501 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (337) 232-4631 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X___ No____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 7, 2002, 1,564,836 shares of the Registrant's common stock were issued and outstanding. Of that total, 202,666 shares were held by the Registrant's Employee Stock Ownership Plan, of which 84,883 were not committed to be released. 1 ACADIANA BANCSHARES, INC. TABLE OF CONTENTS Page Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets (As of June 30, 2002 and December 31, 2001) 3 Consolidated Income Statements (For the three and six months ended June 30, 2002 and 2001) 4 Consolidated Statements of Stockholders' Equity (For the three and six months ended June 30, 2002 and 2001) 5 Consolidated Statements of Cash Flows (For the six months ended June 30, 2002 and 2001) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23 Part II. Other Information Item 1. Legal Proceedings 24 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 26 2 ACADIANA BANCSHARES, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS UNAUDITED June 30, 2002 and December 31, 2001 (In Thousands, except share data) Assets June 30, December 31, 2002 2001 ------------ -------------- Cash and Cash Equivalents: Cash and Amounts Due from Banks $ 1,185 $ 3,097 Interest-Bearing Demand Deposits 10,073 8,198 ------------ -------------- Total Cash and Cash Equivalents 11,258 11,295 Time Deposits in Other Banks 2,948 3,048 Securities Available for Sale, at Fair Value 32,532 19,712 Securities Held to Maturity (Fair Value of $26,003 and $32,048 respectively) 25,907 31,989 Federal Home Loan Bank Stock, at Cost 4,386 4,321 Loans Held for Sale 1,773 4,827 Loans Receivable, Net of Allowance for Loan Losses of $2,422 and $2,710, respectively 217,291 229,891 Investment in Limited Liability Company 855 833 Premises and Equipment, Net 6,359 6,303 Accrued Interest Receivable 1,432 1,398 Cash Surrender Value of Life Insurance 6,310 135 Other Assets 1,864 1,753 ------------ -------------- Total Assets $ 312,915 $ 315,505 ============ ============== Liabilities and Stockholders' Equity Deposits: Non-interest Bearing $ 14,216 $ 14,395 Interest Bearing 196,436 201,174 ------------ -------------- Total Deposits 210,652 215,569 Securities Sold Under Agreements to Repurchase 2,188 2,758 Short-Term Borrowings 2,000 - Accrued Interest Payable 466 524 Long-Term Debt 68,433 68,971 Accrued and Other Liabilities 1,448 871 ------------ -------------- Total Liabilities 285,187 288,693 ------------ -------------- Stockholders' Equity: Preferred Stock of $.01 Par Value; 5,000,000 shares authorized, -0- shares issued or outstanding - - Common Stock of $.01 Par Value; 20,000,000 shares authorized, 2,731,250 shares issued 27 27 Additional Paid-in Capital 32,821 32,626 Retained Earnings 26,314 25,515 Unearned Common Stock Held by ESOP Trust (1,045) (1,177) Unearned Common Stock Held by RRP Trust (373) (434) Accumulated Other Comprehensive Income 359 99 Treasury Stock, at Cost; 1,564,836 and 1,547,529 Shares, respectively (30,375) (29,844) ------------ -------------- Total Stockholders' Equity 27,728 26,812 ------------ -------------- Total Liabilities and Stockholders' Equity $ 312,915 $ 315,505 ============ ==============

The accompanying Notes to Consolidated Financial Statements are an integral part of these Financial Statements. 3 ACADIANA BANCSHARES, INC., AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS UNAUDITED Three and Six Months Ended June 30, 2002 and 2001 (In Thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ------------- ----------- ---------- ------------- Interest and Dividend Income: Loans, including fees $ 4,085 $ 5,124 $ 8,360 $ 10,375 Debt Securities 678 510 1,303 1,125 Dividends 33 45 65 103 Trading Account Securities - 3 - 7 Interest Bearing Deposits 56 147 127 278 ------------- ----------- ---------- ------------- Total Interest and Dividend Income 4,852 5,829 9,855 11,888 ------------- ----------- ---------- ------------- Interest Expense: Deposits 1,544 2,564 3,224 5,325 Securities Sold Under Agreements to Repurchase 10 18 21 25 Borrowings 973 974 1,933 1,955 ------------- ----------- ---------- ------------- Total Interest Expense 2,527 3,556 5,178 7,305 ------------- ----------- ---------- ------------- Net Interest Income 2,325 2,273 4,677 4,583 Provision (credit) for Loan Losses - (45) - (176) ------------- ----------- ---------- ------------- Net Interest Income After Provision for Loan Losses 2,325 2,318 4,677 4,759 ------------- ----------- ---------- ------------- Non-Interest Income: Deposit Service Fees 199 211 408 420 Other Service Fees 22 21 49 47 Gain on Sale of Loans, Net 171 115 323 362 Gain on Sale of Other Assets 110 1 111 - Trading Account Gains, Net - 22 - 27 Income (Loss) From Investment in Limited Liability Company (6) 3 22 30 Earnings on Cash Surrender Value of Life Insurance 105 - 107 - Other 31 22 49 42 ------------- ----------- ---------- ------------- Total Non-Interest Income 632 395 1,069 928 ------------- ----------- ---------- ------------- Non-Interest Expense: Salaries and Employee Benefits 1,204 1,033 2,337 2,107 Occupancy 64 146 136 307 Depreciation 100 88 193 157 Data Processing 73 85 131 180 Advertising & Public Relations 58 78 127 118 Operating Expenses 147 132 260 235 Professional Fees 76 72 127 123 Deposit Expenses 73 69 139 129 Bank Share Tax Expense 76 77 152 154 Directors' Fees 25 35 61 72 Other General & Administrative Expenses 168 180 355 342 ------------- ----------- ---------- ------------- Total Non-Interest Expense 2,064 1,995 4,018 3,924 ------------- ----------- ---------- ------------- Income Before Income Taxes 893 718 1,728 1,763 Income Tax Expense 297 264 609 635 ------------- ----------- ---------- ------------- Net Income $ 596 $ 454 $ 1,119 $ 1,128 ============= =========== ========== ============= Earnings Per Share - basic $ 0.57 $ 0.42 $ 1.06 $ 0.98 ============= =========== ========== ============= Earnings Per Share - diluted $ 0.52 $ 0.40 $ 0.98 $ 0.94 ============= =========== ========== =============

The accompanying Notes to Consolidated Financial Statements are an integral part of these Financial Statements. 4 ACADIANA BANCSHARES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY UNAUDITED Six Months Ended June 30, 2002 and 2001 (In Thousands, except share data) Unearned Unearned Common Common Accumulated Total Additional Stock Held Stock Other Stock- Common Paid-In Retained By ESOP Held By Comprehen- Treasury holders' Stock Capital Earnings Trust RRP Trust sive Income Stock Equity ------- --------- ---------- ---------- ---------- ---------- ---------- -------- Balance, January 1, 2001 $ 27 $ 32,410 $23,863 $ (1,440) $ (749) $ (51) $ (25,278) $ 28,782 Comprehensive Income: Net Income 1,128 1,128 Change in Unrealized Gain (Loss) on Securities Available for Sale, Net of Deferred Taxes 52 52 ----- Total Comprehensive Income 1,180 Common Stock Released by ESOP Trust 84 132 216 Common Stock Earned by Participants of Recognition and Retention Plan Trust 10 151 161 Purchase of Treasury Stock (218,600 shares) (4,566) (4,566) Cash Dividends Declared ($.30 per share) (347) (347) ------- --------- ---------- ---------- ---------- ---------- ---------- -------- Balance, June 30, 2001 $ 27 $ 32,504 $24,644 $ (1,308) $ (598) $ 1 $ (29,844) $ 25,426 ======= ========= ========== ========== ========== ========== ========== ======== Balance, January 1, 2002 $ 27 $ 32,626 $25,515 $ (1,177) $ (434) $ 99 $ (29,844) $ 26,812 Comprehensive Income: Net Income 1,119 1,119 Change in Unrealized Gain (Loss) on Securities Available for Sale, Net of Deferred Taxes 260 260 ----- Total Comprehensive Income 1,379 Common Stock Released by ESOP Trust 145 132 277 Common Stock Earned by Participants of Recognition and Retention Plan Trust 60 61 121 Reissuance of treasury stock under stock option plan (20,656 shares) (10) 399 389 Purchase of Treasury Stock (37,963 shares) (930) (930) Cash Dividends Declared ($.30 per share) (320) (320) ------- --------- ---------- ---------- ---------- ---------- ---------- -------- Balance, June 30, 2002 $ 27 $ 32,821 $26,314 $ (1,045) $ (373) $ 359 $ (30,375) $ 27,728 ======= ========= ========== ========== ========== ========== ========== ========

The accompanying Notes to Consolidated Financial Statements are an integral part of these Financial Statements. 5 ACADIANA BANCSHARES, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED For the Six Months Ended June 30, 2002 and 2001 (In Thousands) Six Months Ended June 30, ------------------------- 2002 2001 ---------- ---------- Cash Flows from Operating Activities: Net Income $1,119 $1,128 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 202 158 Provision (Credit) for Losses on Loans - (176) Noncash Compensation Expenses 345 365 Other (gains) losses, net (112) 25 Income from Investment in Limited Liability Company (22) (30) Accretion of Discounts, Net of Premium Amortization on Securities 183 (1) Amortization of Deferred Revenues and Unearned Income on Loans 22 41 FHLB Stock Dividend Received (65) (103) Net Changes in: Securities Classified as Trading - 95 Loans Held for Sale 3,054 (698) Accrued Interest Receivable (34) 142 Cash Surrender Value of Life Insurance (6,175) - Other Assets (456) (5) Other Liabilities 628 397 ---------- ---------- Total Adjustments (2,430) 210 ---------- ---------- Net Cash (Used in) Provided by Operating Activities (1,311) 1,338 ---------- ---------- Cash Flows from Investing Activities: Activity in Available for Sale Securities: Proceeds from Calls, Maturities and Prepayments 811 6,814 Purchases (13,297) (2,013) Activity in Held to Maturity Securities: Proceeds from Calls, Maturities and Prepayments 5,959 171 Net change in Certificates of Deposit 100 - Net Repayments on Loans 12,743 13,305 Proceeds from Sale of Premises and Equipment 190 - Purchase of Premises and Equipment (328) (1,388) Proceeds from Sale of Foreclosed Assets 228 24 Capital Costs Incurred on Foreclosed Assets (11) (1) ---------- ---------- Net Cash Provided by Investing Activities 6,395 16,912 ---------- ---------- Cash Flows from Financing Activities: Net Change in Deposits (4,917) (7,116) Net Change in Repurchase Agreements (570) 1,801 Net Change in Short-term Borrowings 2,000 - Proceeds from Long-term Debt - 662 Repayment of Long-term Debt (712) (2,546) Dividends Paid to Shareholders (320) (376) Proceeds from sale of treasury stock for stock options exercised 328 - Purchase of Treasury Stock (930) (4,566) ---------- ---------- Net Cash Used in Financing Activities (5,121) (12,141) ---------- ---------- Net (Decrease) Increase in Cash and Cash Equivalents (37) 6,109 Cash and Cash Equivalents, Beginning of Period 11,295 8,467 ---------- ---------- Cash and Cash Equivalents, End of Period $11,258 $14,576 ========== ========== Supplemental Schedule of Noncash Activities: Acquisition of Foreclosed Assets in Settlement of Loans $9 $50 Supplemental Disclosures: Cash Paid For: Interest on Deposits and Borrowings $5,236 $7,287 Income Taxes $470 $430

The accompanying Notes to Consolidated Financial Statements are an integral part of these Financial Statements. 6 ACADIANA BANCSHARES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Basis of Financial Statement Presentation The accompanying consolidated financial statements are unaudited and were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, all normal, recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of financial statements, have been included. These interim unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto for Acadiana Bancshares, Inc. (the "Company") previously filed with the Securities and Exchange Commission in the Company's Annual Report and Form 10-K for the year ended December 31, 2001. The results for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. You may also review financial information posted on the website at www.acadianabancshares.com. Business The Company is a Louisiana corporation organized in February 1996 for the purpose of becoming the bank holding company for LBA Savings Bank (the "Bank"). The Company became a financial holding company in April 2000 operating from its headquarters in Lafayette, Louisiana. The Company also owns Acadiana Holdings, L.L.C., ("Holdings") which was formed in May 2000 for the purposes of acquiring a new facility for the Company headquarters and the Bank's main office. The Company's marketing area is primarily in the parish of Lafayette, Louisiana and secondarily in other surrounding parishes in southwest Louisiana. The Company's principal business is the operation of the Bank which conducts business from its main office and four branch offices, of which three branches are located in Lafayette, Louisiana, and one branch is located in New Iberia, Louisiana. Additionally, the Bank operates one loan production office in Eunice, Louisiana. The Company provides a variety of financial services primarily to individuals, but also to commercial business customers. The primary activities of the Company in the operation of the Bank are making loans and investments and attracting deposits. Borrowings provide an alternative source of funds to support lending and investing activities, and the operation of the Company. The banking industry is extensively regulated under both federal and state law. The Company, as a financial holding company, is subject to regulation and supervision under the Bank Holding Company Act of 1956 ("BHCA") by the Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "FRB"). The BHCA requires the Company to obtain the prior approval of the FRB for bank and non-bank acquisitions and prescribes certain limitations in connection with acquisitions and the non-banking activities of the Company. The Company's banking activities are subject to regulation and examination by the Office of Financial Institutions of the State of Louisiana ("OFI"), which is the Bank's chartering authority and primary regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of the Bank's deposits. The Bank is also subject to certain reserve requirements established by the FRB. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is one of twelve regional banks comprising the FHLB System. 7 The Bank is an FDIC-insured, Louisiana chartered, stock savings bank. Other supervisory and regulatory issues are discussed in the Company's 2001 Annual Report and its Form 10-K for the year ended December 31, 2001. Principles of Consolidation The consolidated financial statements include the accounts of the Company, the Bank, and Holdings. All significant intercompany balances and transactions have been eliminated in consolidation. (2) Loans Receivable Loans receivable at June 30, 2002 and December 31, 2001 are summarized as follows (in thousands): June 30, December 31, 2002 2001 ___________________________________ _________ ____________ Mortgage Loans: Single-Family Residential 122,286 139,739 Construction 8,251 6,093 Multi-Family Residential 529 166 Commercial Real Estate 43,338 40,119 Equity Lines of Credit 5,422 4,421 --------- ------------ Total Mortgage Loans 179,826 190,538 Commercial Business Loans 19,753 20,468 Other Consumer Loans 25,534 25,287 --------- ------------ Total Loans 225,113 236,293 Less: - Allowance for loan losses (2,422) (2,710) Net deferred loan fees (243) (161) Unadvanced loan funds (5,157) (3,531) --------- ------------ Loans, net 217,291 229,891 ========= ============ The following is an analysis of the allowance for possible loan losses for the six months ended June 30, 2002 and for the year ended December 31, 2001 (in thousands): June 30, December 31, 2002 2001 ___________________________________ _________ ____________ Balance, Beginning $ 2,710 $ 2,714 Provision Charged to Income - 20 Loans Charged Off (361) (243) Loans Recovered 73 219 --------- ------------ Balance, Ending $ 2,422 $ 2,710 ========= ============ 8 (3) Earnings Per Share Weighted average shares of common stock outstanding for basic earnings per share ("EPS") excludes the weighted average shares unreleased by the Employee Stock Ownership Plan ("ESOP") (89,851 and 111,746 shares for the quarters ending June 30, 2002 and June 30, 2001, respectively) and the weighted average unvested shares in the Recognition and Retention Plan ("RRP") (27,186 and 45,205 for the quarters ending June 30, 2002 and June 30, 2001, respectively). The effect on diluted EPS of stock option shares outstanding and unvested RRP shares are calculated using the treasury stock method. The following is a reconcilement of the numerator and denominator for basic and diluted EPS: For the Three Months Ended June 30, For the Six Months Ended June 30, ----------------------------------- --------------------------------- 2002 2001 2002 2001 --------------- ------------- ------------- --------------- Numerator: Income Applicable to Common Shares $ 596,000 $ 454,000 $ 1,119,000 $ 1,128,000 =============== ============= ============= =============== Denominator: Weighted Average Common Shares Outstanding 1,047,333 1,085,360 1,051,018 1,153,583 Effect of Dilutive Securities: Stock Options Outstanding 82,359 53,358 79,372 42,811 RRP Grants 6,657 10,017 5,831 7,437 --------------- ------------- ------------- --------------- Weighted Average Common Shares Outstanding Assuming Dilution 1,136,349 1,148,735 1,136,221 1,203,831 =============== ============= ============= =============== Earnings per Share $ 0.57 $ 0.42 $ 1.06 $ 0.98 =============== ============= ============= =============== Earnings per Share - Assuming Dilution $ 0.52 $ 0.40 $ 0.98 $ 0.94 =============== ============= ============= ===============

Recent Accounting Pronouncements In April of 2002 the Financial Accounting Standards Board ("FASB") issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The statement updates, clarifies and simplifies existing accounting pronouncements on several specific, specialized matters, including extinguishments of debt and sale- leaseback transactions. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operation. In July of 2002 the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. In many cases costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. Statement No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operation. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results Of Operations. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT In addition to historical information, this Form 10-Q includes certain "forward-looking statements," as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on current management expectations. The Company's actual results could differ materially from those management expectations. Such forward-looking statements include statements regarding our intentions, beliefs or current expectations as well as the assumptions on which such statements are based. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and the Company's ability to lease additional space to third parties at its headquarters, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward- looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. OVERVIEW Management continued its effort to reduce the Company's historical dependence on interest income from long-term residential mortgage loans while increasing its commercial and consumer loan business; however, this strategy has slowed short-term earnings growth in the current yield curve environment. The average balance of residential loans, as a percentage of average earning assets, declined from 61.6% for the year ended December 31, 2000 to 55.6% for the year ended December 31, 2001 and to 45.4% for the six months ended June 30, 2002, and 44.1% for the three months ended June 30, 2002. During those same periods, the Company's average balance of commercial and consumer loans increased as a percentage of average earning assets, from 22.5% for the year ended December 31, 2000 to 27.5% for the year ended December 31, 2001, and to 29.8% for the six months ended June 30, 2002, and 30.6% for the three months ended June 30, 2002. The Company's average balance of investments and other earning assets increased from 15.9% of average earning assets for the year ended December 31, 2000 to 16.9% for the year ended December 31, 2001 and to 24.8% for the six months ended June 30, 2002, and 25.3% for the three months ended June 30, 2002. Though the Company's earning asset mix continues to change from a heavier weighting in long-term residential loans toward shorter term commercial and consumer loans and shorter term investments and other earning assets, the average yield on interest earning assets declined from 7.86% for the year ended December 31, 2000, to 7.53% for the year ended December 31, 2001, and to 6.72% for the six months ended June 30, 2002, and 6.66% for the three months ended June 30, 2002. The significant drop in prime rate and other short 10 term market rates together with the shift in loan product mix are reflected in the decline in average yields on the Company's assets. Management has also made an effort to maintain net interest income by lowering its offering rates on deposits and thereby reducing the Company's cost of deposits sufficiently to offset the drop in interest income. We believe the Company's pricing strategy resulted in lowering the cost of deposits. The Company's primary deposit funding source is from certificates of deposit. The average cost of certificates of deposit decreased from 5.82% for the year ended December 31, 2000 to 5.34% for the year ended December 31, 2001, and to 3.94% for the six months ended June 30, 2002, and 3.83% for the three months ended June 30, 2002. Management has also made an effort to increase the repricing terms of its time deposits thereby lessening the sensitivity of such costs in a changing rate environment. Fixed rate time deposits are reported by remaining maturity and floating rate time deposits are reported by the next repricing date. At December 31, 2000, 22.5% of the Company's time deposits were scheduled to mature or reprice in more than one year. At December 31, 2001, 39.6% of the Company's time deposits were scheduled to mature or reprice in more than one year. We reported last quarter that at March 31, 2002, 41.2% of the Company's time deposits were scheduled to mature or reprice in more than one year. At June 30, 2002, 44.4% of the Company's time deposits were scheduled to mature or reprice in more than one year. We believe the current rate environment and other local market conditions make it unlikely to expect further lengthening of such repricing terms. At June 30, 2002, the consolidated assets of the Company were $312.9 million, a decrease of $2.6 million, or 0.8%, compared with $315.5 million at December 31, 2001. The decline in total assets is primarily attributable to deposit outflows. Management believes that the Company's lower offering rates on deposits, reflective of current market conditions, may have resulted in the decrease of $4.9 million, or 2.3%, in total deposits. The Company had total liabilities of $285.2 million at June 30, 2002, compared to $288.7 million at December 31, 2001. During the six months ended June 30, 2002, the Company's single-family residential loan portfolio decreased by $17.5 million from December 31, 2001, primarily as a result of prepayments on residential loans and the sale of $24.1 million of newly originated residential mortgage loans (which total includes completed residential construction loans) in the secondary market during that period. We reported that for the first quarter ended March 31, 2002, the Company's originations of new consumer and commercial business loans were more than offset by repayments resulting in a decrease in the commercial and consumer loan portfolios by a total of $1.9 million and that as an alternative to new loan originations, the Company purchased $10.3 million of securities available for sale and it purchased $6.0 million of bank owned life insurance during the first quarter. During the three months ended June 30, 2002, the Company's consumer and commercial loan portfolios grew $6.0 million, net of repayments, and the Company purchased an additional $3.0 million of securities available for sale. ASSETS Total cash and cash equivalents decreased $37,000, or 0.3%, remaining relatively stable at approximately $11.3 million at June 30, 2002 and December 31, 2001. Net cash provided by (used in) operating activities, investing activities, and financing activities amounted to ($1.3 million), $6.4 million, and ($5.1 million), respectively, for the six months ended June 30, 2002. Cash and cash equivalents funded 3.6% of total assets at June 30, 2002 and December 31, 2001. The Company has $2.9 million in time deposits in other banks as of June 30, 2002. The Company has no more than $100,000 at any one bank, matching the expected insured limit of bank 11 deposits by the Federal Deposit Insurance Corporation. The Company has no intention to invest more that $100,000 at any one bank. Securities available for sale increased $12.8 million, or 65.0%, to $32.5 million at June 30, 2002, compared with $19.7 million at December 31, 2001. The primary reasons for such increase were the purchase of $13.3 million of new securities and an increase in fair value of the securities of $394,000, both of which were partially offset by principal repayments of $811,000 of investment securities. Securities available for sale primarily include U.S. Treasury notes and bonds, federal agency bonds, mortgage-backed securities, and corporate obligations. Unrealized gains and losses on securities available for sale are excluded from earnings and reported, net of applicable income taxes, as a component of other comprehensive income. As of June 30, 2002, investment securities available for sale amounted to 10.4% of total assets, compared to 6.2% of total assets at December 31, 2001. Securities held to maturity decreased $6.1 million, or 19.0%, from $32.0 million at December 31, 2001 to $25.9 million at June 30, 2002. Securities held to maturity consist of mortgage-backed securities. At June 30, 2002 securities held to maturity amounted to 8.3% of total assets compared to 10.1% at December 31, 2001. Loans receivable, net, decreased $12.6 million, or 5.5%, to $217.3 million at June 30, 2002, compared to $229.9 million at December 31, 2001. Single- family residential loans decreased $17.5 million, or 12.5%, from $139.7 million at December 31, 2001, to $122.3 million at June 30, 2002. Construction loans (which include primarily single-family residential construction) increased $2.2 million, from $6.1 million at December 31, 2001 to $8.3 million at June 30, 2002. Multi-family residential mortgage loans increased $363,000, or 218.7%, from $166,000 at December 31, 2001, to $529,000 at June 30, 2002. Commercial real estate loans increased $3.2 million, or 8.0%, from $40.1 million at December 31, 2001, to $43.3 million at June 30, 2002. Equity lines of credit increased $1.0 million, or 22.6%, from $4.4 million at December 31, 2001 to $5.4 million at June 30, 2002. Commercial business loans decreased $715,000, or 3.5%, from $20.5 million at December 31, 2001, to $19.8 million at June 30, 2002. Other consumer loans increased $247,000, or 1.0%, from $25.3 million at December 31, 2001, to $25.5 million at June 30, 2002. Total gross loans decreased $11.2 million, or 4.7%, from $236.3 million at December 31, 2001, to $225.1 million at June 30, 2002. Loans receivable, net, amounted to 69.4% of total assets at June 30, 2002, compared to 72.9% of total assets at December 31, 2001. Note 2 to the Consolidated Financial Statements provides additional information regarding the Company's loans. The Company had $6.3 million in cash surrender value of life insurance as of June 30, 2002. Near the end of the quarter ended June 30, 2002, the Company purchased $6.0 million of bank owned life insurance, with consent, insuring the lives of several of its officer managers. The Company's purpose for this investment is to generate other income to partially offset the rising costs of certain employee benefit plans. Increases in cash surrender value are included in non-interest income. At June 30, 2002 cash surrender value of life insurance amounted to 2.0% of total assets. LIABILITIES AND STOCKHOLDERS' EQUITY The Company's primary funding sources include deposits, securities sold under agreements to repurchase, borrowings from the FHLB and other banks, and stockholders' equity. The discussion that follows focuses on the major changes in this mix during the six months ended June 30, 2002. 12 The Company's deposits decreased by $4.9 million, or 2.3%, to $210.7 million at June 30, 2002, compared to $215.6 million at December 31, 2001. Interest bearing deposits decreased $4.7 million, or 2.4%, and non-interest bearing deposits decreased $179,000, or 1.2%. Certificates of deposit, comprising the largest portion of interest-bearing deposits, amounted to $146.0 million at June 30, 2002, a decrease of $6.7 million, or 4.4%, from $152.7 million at December 31, 2001. Total deposits funded 67.3% of total assets at June 30, 2002, compared to 68.3% at December 31, 2001. The Company's borrowings generally include both short-term borrowings (amounts maturing in one year or less from date of inception) and long-term debt (amounts maturing more than one year from date of inception). Short-term borrowings in the form of securities sold under agreements to repurchase consist of overnight borrowings, primarily from business entities who are also deposit customers of the Company. Securities sold under agreements to repurchase amounted to $2.2 million at June 30, 2002, compared to $2.8 million at December 31, 2001. The Company also had $2.0 million of short-term borrowings at June 30, 2002 compared to none at December 31, 2001. Long-term debt decreased $538,000, or 0.8%, from $69.0 million at December 31, 2001 to $68.4 million at June 30, 2002. Long-term debt funded 21.9% of assets both at June 30, 2002 and at December 31, 2001. Long-term debt consists primarily of advances from the FHLB. Advances from the FHLB amounted to $65.4 million of long-term debt at June 30, 2002, a substantial portion of which is callable by the FHLB of Dallas. In the current interest rate environment, management does not believe it is likely that such advances will be called. Such advances have substantial prepayment penalties and thus, except if called by the FHLB, management does not expect to repay such debt until final maturity. Without regard to callable features, at June 30, 2002, advances from the FHLB with a remaining maturity of one year or less, with a remaining maturity of more than one year through three years and with a remaining maturity of more than three years amounted to $3.1 million, $250,000, and $64.0 million, respectively. Advances from the FHLB have been, and are expected to continue to be, an important source of funding for both existing assets and new asset growth. Stockholders' equity provides a source of permanent funding, allows for future growth, and provides the Company with a cushion to withstand unforeseen, adverse developments. At June 30, 2002, stockholders' equity totaled $27.7 million, an increase of $916,000 or 3.4%, compared to $26.8 million at December 31, 2001. The increase was primarily attributable to $1.1 million of net income of the six months ended June 30, 2002, together with an increase in other comprehensive income of $260,000, the release of common stock related to the Company's employee stock benefit plans totaling $398,000, and by the reissuance of treasury stock under the stock option plan totaling $389,000, all of which was partially offset by aggregate repurchases of common stock for treasury of $930,000 and by $320,000 of dividends declared on the Company's common stock. Stockholders' equity funded 8.9% and 8.5% of assets at June 30, 2002 and at December 31, 2001, respectively. Federal regulations impose minimum regulatory capital requirements on all financial institutions with deposits insured by the FDIC, which requirements directly affect the minimum capital levels at the Bank. The FRB also imposes minimum regulatory capital requirements, which directly affect the minimum capital levels at the Company. At June 30, 2002 the capital of the Bank and the capital of the Company exceeded all minimum regulatory requirements. 13 RESULTS OF OPERATIONS The Company reported net income of $596,000 and earnings per share of $0.57 (basic) and $0.52 (diluted) for the three months ended June 30, 2002, compared to net income of $454,000 and earnings per share of $0.42 (basic) and $0.40 (diluted) for the three months ended June 30, 2001. Net income increased $142,000 and basic earnings per share increased 35.7% comparing the current quarter to the year ago quarter. The Company reported net income of $1.1 million and earnings per share of $1.06 (basic) and $0.98 (diluted) for the six months ended June 30, 2002, compared to net income of $1.1 million and earnings per share of $0.98 (basic) and $0.94 (diluted) for the six months ended June 30, 2001. Net income decreased $9,000 and basic earnings per share increased 8.2% comparing the current six-month period to the year ago six-month period. The Company continued selling substantially all newly originated single- family residential mortgage loan production, which sales amounted to $24.1 million for the six months ended June 30, 2002, compared to $25.6 million for the six months ended June 30, 2001. Net gains from such sales are included in non-interest income and amounted to $171,000 and $115,000 for the three months ended June 30, 2002 and 2001, respectively, and $323,000 and $362,000 for the six months ended June 30, 2002 and 2001, respectively. Non-interest income was $632,000 for the three months ended June 30, 2002, compared to $395,000 for the three months ended June 30, 2001, representing an increase of $237,000. The primary reasons for this increase in non-interest income were the earnings of $105,000 during the current quarter on the cash surrender value of life insurance, which the Company did not own in the 2001 fiscal year, and a $110,000 net gain from the settlement of an expropriation of property, which is not expected to be recurring income. Non-interest income was $1.1 million for the six months ended June 30, 2002 compared to $928,000 for the six months ended June 30, 2001. Net Interest Income Net interest income is determined by the combined effects of interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and changes in the average amounts of interest-earning assets and interest-bearing liabilities. The Company's average interest rate spread was 2.88% and 2.49% during the three months ended June 30, 2002 and 2001, respectively. Both rates (the average yield on interest-earning assets and average cost of interest-bearing liabilities) and volumes (the average balances of interest-earning assets and average balances of interest-bearing liabilities) influence net interest margin. The Company's interest rate margin (i.e., the difference between interest income and interest expense multiplied by average interest-earning assets) was 3.19%, and 2.96%, during the three months ended June 30, 2002 and 2001, respectively. The 23 basis point (with 100 basis points being equal to 1%) increase in net interest margin in the second quarter of 2002 compared to 2001 was primarily the result of the Company's effort to reduce its average cost of deposits to help offset the declining average yields on the Company's loans and investment securities, which resulted in faster decreases in the average rates paid on the average balances of interest-bearing deposits and borrowings than in the average yields earned on the Company's loans, investment securities, and other interest-earning assets. Lessening the effects of such efforts, the decrease in the average balance of interest-earning assets of $15.1 million more than offset the decrease in the average balance of interest- bearing liabilities of $10.7 million, for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. The Company's net interest income 14 increased $52,000, or 2.3%, remaining relatively stable at approximately $2.3 million for the quarters ended June 30, 2001 and 2002. The Company's average interest rate spread was 2.85% and 2.49% during the six months ended June 30, 2002 and 2001, respectively. The Company's interest rate margin was 3.19%, and 2.99%, during the six months ended June 30, 2002 and 2001, respectively. The 20 basis point increase in net interest margin in the first six months of 2002 compared to 2001 was primarily the result of the Company's effort to reduce its average cost of deposits to help offset the declining average yields on the Company's loans and investment securities, which resulted in faster decreases in the average rates paid on the average balances of interest-bearing deposits and borrowings than in the average yields earned on the Company's loans, investment securities, and other interest- earning assets. Lessening the effects of such efforts, the decrease in the average balance of interest-earning assets of $13.6 million more than offset the decrease in the average balance of interest-bearing liabilities of $10.1 million, for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. The Company's net interest income increased $94,000, or 2.1%, from $4.6 million for the six months ended June 30, 2001, to $4.7 million for the six months ended June 30, 2002. The Company's largest group of interest-earning assets is residential mortgage loans, comprising 44.1% and 45.4% of total average interest-earning assets for the three and six months ended June 30, 2002, respectively. Market rates on residential mortgage loans are heavily influenced by competition and on the rates of interest on longer term U.S. Treasury Bonds, such as the 10- year and 30-year bonds. Significant changes in longer term U.S. Government Treasury Bond rates likely translate to similar changes in offering rates for residential mortgage loans. The Company's largest source of funds is certificates of deposit, which for the three and six months ended June 30, 2002, amounted to 54.2% and 54.6%, respectively, of total average interest- bearing liabilities. Market rates on shorter term U.S. Government Notes and Bonds, and offering rates by competition heavily influence the Company's offering rates on certificates of deposit. Significant changes in shorter term U.S. Government Notes and Bonds may translate into somewhat similar changes in offering rates for certificates of deposit. If longer term U.S. Government Treasury Bond rates fall, and during the same time period, shorter term U.S. Government Treasury Notes and Bond rates rise, the Company's net interest margin would likely decrease. Interest and Dividend Income Interest and dividend income totaled $4.9 million for the three months ended June 30, 2002, compared to $5.8 million for the three months ended June 30, 2001, a decrease of $977,000, or 16.8%. This decrease was mainly due to a decrease in the average balances of interest-earning assets of $15.1 million, or 4.9%, together with a decrease of 94 basis points in the yield earned on the Company's average interest-earning assets. Interest and dividend income totaled $9.9 million for the six months ended June 30, 2002, compared to $11.9 million for the six months ended June 30, 2001, a decrease of $2.0 million, or 17.1%. This decrease was mainly due to a decrease in the average balances of interest-earning assets of $13.6 million, or 4.4%, together with a decrease of 103 basis points in the yield earned on the Company's average interest-earning assets. Interest income earned on loans decreased $1.0 million, or 20.3%, from $5.1 million for the three months ended June 30, 2001 to $4.1 million for the three months ended June 30, 2002. This decrease was due to a decrease in the Company's average balance of loans for the three months 15 ended June 30, 2002, of $39.0 million, or 15.1%, compared to the three months ended June 30, 2001, together with a decrease of 49 basis points in the yield earned on the Company's average balance of loans. The average balance of residential mortgage loans decreased $46.5 million, while the average balance of commercial loans increased $6.5 million, or 12.3%, and the average balance of consumer and other loans increased $1.1 million, or 3.7%. The average yield earned on the loan portfolio was 7.50% for the three months ended June 30, 2002, resulting in a decrease of 49 basis points from the 7.99% yield earned on the loan portfolio for the three months ended June 30, 2001. The net downward changes in average loan balances reflect the results of the Company's continuing strategy to reduce its historical dependence on residential mortgage loans, which is occurring at a faster pace than growth in commercial and consumer loans. Interest income earned on loans decreased $2.0 million, or 19.4%, from $10.4 million for the six months ended June 30, 2001 to $8.4 million for the six months ended June 30, 2002. This decrease was due to a decrease in the Company's average balance of loans for the six months ended June 30, 2002, of $36.7 million, or 14.1%, compared to the six months ended June 30, 2001, together with a decrease of 49 basis points in the yield earned on the Company's average balance of loans. The average balance of residential mortgage loans decreased $45.1 million, while the average balance of commercial loans increased $7.5 million, and the average balance of consumer and other loans increased $883,000. The average yield earned on the loan portfolio was 7.58% for the six months ended June 30, 2002, reflecting a decrease of 49 basis points from the 8.07% yield earned on the loan portfolio for the six months ended June 30, 2001. Interest and dividend income earned on investment securities increased $156,000, or 28.1%, from $555,000 for the three months ended June 30, 2001 to $711,000 for the three months ended June 30, 2002. This increase was due to an increase in the Company's average balance of investment securities of $27.6 million, or 76.4%, which was partially offset by a 169 basis point decrease in the Company's average yield earned on investment securities for the three months ended June 30, 2002 compared to the Company's average yield earned on investment securities for the three months ended June 30, 2001. Interest and dividend income earned on investment securities increased $140,000, or 11.4%, from $1.2 million for the six months ended June 30, 2001 to $1.4 million for the six months ended June 30, 2002. This increase was due to an increase in the Company's average balance of investment securities of $23.3 million, or 61.3%, which was partially offset by a 202 basis point decrease in the Company's average yield earned on investment securities for the six months ended June 30, 2002 compared to the Company's average yield earned on investment securities for the six months ended June 30, 2001. Interest income earned on other interest-earning assets decreased $94,000, or 62.7%, from $150,000 for the three months ended June 30, 2001, to $56,000 for the three months ended June 30, 2002. This decrease was primarily due to a decrease in the Company's average yield earned on other interest-earning assets of 210 basis points, from 4.29% to 2.19%, together with a decrease in the Company's average balance of other interest-earning assets of $3.8 million, or 27.1%, from $14.0 million for the three months ended June 30, 2001, to $10.2 million at June 30, 2002. Other earning assets consist primarily of cash invested overnight. Interest income earned on other interest-earning assets decreased $158,000, or 55.4%, from $285,000 for the six months ended June 30, 2001, to $127,000 for the six months ended June 30, 2002. This decrease was primarily due to a decrease in the Company's average yield earned on other interest- earning assets of 257 basis points, from 4.72% to 2.15%, together with a decrease in 16 the Company's average balance of other interest-earning assets of $244,000, or 2.0%, from $12.2 million for the six months ended June 30, 2001, to $11.9 million at June 30, 2002. Other earning assets consist primarily of cash invested overnight. Interest Expense Interest expense decreased $1.0 million, or 28.9%, from $3.6 million for the three months ended June 30, 2001, to $2.5 million for the three months ended June 30, 2002. This decrease was due to a decrease in both the cost of interest-bearing liabilities and by a decrease in the average balance of interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $10.7 million, or 3.8%, from $279.2 million for the three months ended June 30, 2001, to $268.5 million for the three months ended June 30, 2002. The cost of such interest-bearing liabilities decreased 133 basis points for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. Interest expense decreased $2.1 million, or 29.1%, from $7.3 million for the six months ended June 30, 2001, to $5.2 million for the six months ended June 30, 2002. This decrease was due to a decrease in both the cost of such liabilities and by a decrease in the average balance of interest-bearing liabilities. The average balance of interest-bearing liabilities decreased $10.1 million, or 3.6%, from $279.9 million for the six months ended June 30, 2001, to $269.8 million for the six months ended June 30, 2002. The cost of such interest-bearing liabilities decreased 139 basis points for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. The average balance of interest-bearing deposits decreased $13.2 million, or 6.3%, from $209.4 million for the three months ended June 30, 2001, to $196.2 million for the three months ended June 30, 2002. The interest expense on average interest-bearing deposits decreased $1.0 million, or 39.8%, from $2.6 million for the three months ended June 30, 2001 to $1.5 million for the three months ended June 30, 2002. The cost of such average deposits decreased from 4.91% to 3.16% or 175 basis points for the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. The average balance of interest-bearing deposits decreased $12.4 million, or 5.9%, from $210.3 million for the six months ended June 30, 2001, to $197.8 million for the six months ended June 30, 2002. The interest expense on average interest-bearing deposits decreased $2.1 million, or 39.9%, from $5.3 million for the six months ended June 30, 2001 to $3.2 million for the six months ended June 30, 2002. The cost of such average deposits decreased from 5.11% to 3.29% or 182 basis points for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. The average balance of securities sold under agreements to repurchase amounted to $2.4 million for the three months ended June 30, 2002 compared to $2.1 million for the three months ended June 30, 2001. The average cost of securities sold under agreements to repurchase was 1.69% for the three months ended June 30, 2002 compared to 3.45% for the three months ended June 30, 2001. The average balance of securities sold under agreements to repurchase amounted to $2.5 million for the six months ended June 30, 2002 compared to $1.4 million for the six months ended June 30, 2001. The average cost of securities sold under agreements to repurchase was 1.70% for the six months ended June 30, 2002 compared to 3.62% for the six months ended June 30, 2001. 17 Interest expense on borrowings (consisting primarily of fixed rate advances from the FHLB) decreased $1,000, or 0.1%, from $974,000 for the three months ended June 30, 2001, to $973,000 for the three months ended June 30, 2002. The primary reason for the decrease was a 20 basis point decrease in the average cost of such borrowings, which was partially offset by a $2.3 million, or 3.3%, increase in the average balance of such borrowings. Interest expense on borrowings (consisting primarily of fixed rate advances from the FHLB) decreased $22,000, or 1.1%, from $2.0 million for the six months ended June 30, 2001, to $1.9 million for the six months ended June 30, 2002. The primary reason for the decrease was a 17 basis point decrease in the average cost of such borrowings, which was partially offset by a $1.2 million, or 1.8%, increase in the average balance of such borrowings. Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following tables set forth, for the periods indicated, information regarding (i) the dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Non-accrual loans have been included in the appropriate average balance loan category, but interest on non-accrual loans has been included for purposes of determining interest income only to the extent that cash payments were actually received. Three Months Ended Three Months Ended ---------------------------------- ---------------------------------- June 30, 2002 June 30, 2001 ---------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/cost Balance Interest Yield/cost (Dollars in Thousands) --------- -------- ---------- --------- -------- ---------- Interest-earning assets: Loans receivable: Residential mortgage loans (1) $ 129,011 $ 2,443 7.60 % $ 175,529 $ 3,363 7.68 % Commercial loans 59,274 1,061 7.18 52,793 1,126 8.55 Consumer and other loans 30,112 581 7.74 29,042 635 8.77 --------- -------- ---------- --------- -------- ---------- Total loans 218,397 4,085 7.50 257,364 5,124 7.99 Investment securities (2) 63,791 711 4.47 36,166 555 6.16 Other earning assets 10,237 56 2.19 14,034 150 4.29 --------- -------- ---------- --------- -------- ---------- Total interest-earning assets 292,425 4,852 6.66 307,564 5,829 7.60 -------- ---------- -------- ---------- Noninterest-earning assets 18,865 12,679 --------- --------- Total Assets $ 311,290 $ 320,243 Interest-bearing liabilities: ========= ========= Deposits: Demand deposits $ 37,166 $ 121 1.31 % $ 33,809 $ 199 2.36 % Savings deposits 13,575 34 1.00 12,120 43 1.42 Certificates of deposit 145,480 1,389 3.83 163,515 2,322 5.70 --------- -------- ---------- --------- -------- ---------- Total interest-bearing deposits 196,221 1,544 3.16 209,444 2,564 4.91 Securities sold under Repurchase Agreements 2,373 10 1.69 2,095 18 3.45 Borrowings 69,895 973 5.58 67,641 974 5.78 --------- -------- ---------- --------- -------- ---------- Total interest-bearing liabilities 268,489 2,527 3.78 279,180 3,556 5.11 -------- ---------- -------- ---------- Noninterest-bearing demand deposits 13,605 12,018 Other noninterest-bearing liabilities 1,844 2,462 --------- --------- Total liabilities 283,938 293,660 --------- --------- Stockholders' equity 27,352 26,583 --------- --------- Total liabilities and stockholders' equity $ 311,290 $ 320,243 ========= ========= Net interest-earning assets $ 23,936 $ 28,384 ========= ========= Net interest income/interest rate spread $ 2,325 2.88 % $ 2,273 2.49 % ======== ========== ======== ========== Net interest margin 3.19 % 2.96 % ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 108.92 % 110.17 % ======== ========

_______________________________________________ (1) Includes loans held for sale. (2) Includes FHLB stock. 18 Six Months Ended Six Months Ended ---------------------------------- ---------------------------------- June 30, 2002 June 30, 2001 ---------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/cost Balance Interest Yield/cost (Dollars in Thousands) --------- -------- ---------- --------- -------- ---------- Interest-earning assets: Loans receivable: Residential mortgage loans (1) $ 134,211 $ 5,085 7.64 % $ 179,292 $ 6,876 7.73 % Commercial loans 58,641 2,117 7.28 51,101 2,230 8.80 Consumer and other loans 29,636 1,158 7.88 28,753 1,269 8.90 --------- -------- ---------- --------- -------- ---------- Total loans 222,488 8,360 7.58 259,146 10,375 8.07 Investment securities (2) 61,395 1,368 4.49 38,054 1,228 6.51 Other earning assets 11,935 127 2.15 12,179 285 4.72 --------- -------- ---------- --------- -------- ---------- Total interest-earning assets 295,818 9,855 6.72 309,379 11,888 7.75 -------- ---------- -------- ---------- Noninterest-earning assets 16,253 12,431 --------- --------- Total Assets $ 312,071 $ 321,810 Interest-bearing liabilities: ========= ========= Deposits: Demand deposits $ 37,179 $ 277 1.50 % $ 33,806 $ 481 2.87 % Savings deposits 13,327 66 1.00 12,095 102 1.70 Certificates of deposit 147,334 2,881 3.94 164,388 4,742 5.82 --------- -------- ---------- --------- -------- ---------- Total interest-bearing deposits 197,840 3,224 3.29 210,289 5,325 5.11 Securities sold under Repurchase Agreements 2,498 21 1.70 1,394 25 3.62 Borrowings 69,432 1,933 5.61 68,234 1,955 5.78 --------- -------- ---------- --------- -------- ---------- Total interest-bearing liabilities 269,770 5,178 3.87 279,917 7,305 5.26 -------- ---------- -------- ---------- Noninterest-bearing demand deposits 13,208 11,575 Other noninterest-bearing liabilities 1,821 2,492 --------- --------- Total liabilities 284,799 293,984 --------- --------- Stockholders' equity 27,272 27,826 --------- --------- Total liabilities and stockholders' equity $ 312,071 $ 321,810 ========= ========= Net interest-earning assets $ 26,048 $ 29,462 ========= ========= Net interest income/interest rate spread $ 4,677 2.85 % $ 4,583 2.49 % ======== ========== ======== ========== Net interest margin 3.19 % 2.99 % ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 109.66 % 110.53 % ======== ========

_______________________________________________ (1) Includes loans held for sale. (2) Includes FHLB stock. Provision for Loan Losses Provisions for loan losses are charged to earnings in order to bring the total allowance for loan losses to a level considered appropriate by management based on methodology implemented by the Company, which is designed to assess, among other things, historical loan loss experience, the volume and type of lending conducted by the Company, the amount of the Company's classified assets, the status of past due principal and interest payments, loan-to-value ratios of loans in the portfolio, general economic conditions, particularly as they relate to the Company's market area, and any other factors related to the collectibility of the Company's loan portfolio. Management of the Company assesses the allowance for loan losses on at least a quarterly basis and makes provisions for loan losses as deemed appropriate in order to maintain the adequacy of the allowance for loan losses. Based on its overall assessment of the allowance for loan losses, the Company had no provision for loan losses for the three and six months ended June 30, 2002, and a credit of $45,000 19 and $176,000 in the provision for loan losses for the three and six months ended June 30, 2001, respectively. At June 30, 2002, the Company's allowance for loan losses amounted to $2.4 million, or 1.1% of total loans and 424.9% of the total of non-performing loans and loans considered troubled debt restructuring. At December 31, 2001, the Company's allowance for loan losses amounted to $2.7 million, or 1.1% of total loans and 586.7% of the total of non-performing loans and loans considered troubled debt restructuring. Non-Interest Income In an effort to reduce its historical dependence on interest income from long-term residential loans the Company continued selling substantially all newly originated single-family residential mortgage loan production, which sales amounted to $24.1 million for the six months ended June 30, 2002, compared to $25.6 million for the six months ended June 30, 2001. Net gains from such sales are included in non-interest income and amounted to $171,000 and $115,000 for the three months ended June 30, 2002 and 2001, respectively, and $323,000 and $362,000 for the six months ended June 30, 2002 and 2001, respectively. Non-interest income was $632,000 for the three months ended June 30, 2002, compared to $395,000 for the three months ended June 30, 2001, representing an increase of $237,000. The primary reasons for this increase in non-interest income were the earnings of $105,000 during the three months ended June 30, 2002 on the cash surrender value of life insurance, which the Company did not own in the 2001 fiscal year, and a $110,000 net gain from the settlement of an expropriation of property, which is not expected to be recurring income. Non- interest income was $1.1 million for the six months ended June 30, 2002 compared to $928,000 for the six months ended June 30, 2001. Non-Interest Expense Non-interest expense includes salaries and employee benefits, occupancy, depreciation, data processing, advertising and public relations, professional fees, deposit related expenses, bank share tax expense, directors' fees, certain operating expenses, and other general and administrative expenses and other expense items. Non-interest expense increased $69,000, or 3.5%, from $2.0 million for the three months ended June 30, 2001 to $2.1 million for the three months ended June 30, 2002. Salaries and employee benefits increased $171,000, or 16.6%; occupancy expense decreased $82,000, or 56.2%, depreciation expense increased $12,000, or 13.6%; data processing expense decreased $12,000, or 14.1%; advertising and public relations expense decreased $20,000, or 25.6%; operating expenses increased $15,000, or 11.4%, professional fees increased $4,000, or 5.6%, deposit expenses increased $4,000, or 5.8%, bank share tax expenses decreased $1,000, or 1.3%, directors' fees decreased $10,000, or 28.6%, and all other expenses decreased $12,000, or 6.7%. Non-interest expense increased $94,000, or 2.4%, from $3.9 million for the six months ended June 30, 2001 to $4.0 million for the six months ended June 30, 2002. Salaries and employee benefits increased $230,000, or 10.9%; occupancy expense decreased $171,000, or 55.7%, depreciation expense increased $36,000, or 22.9%; data processing expense decreased $49,000, or 27.2%; advertising and public relations expense increased $9,000, or 7.6%; operating expenses increased $25,000, or 10.6%, professional fees increased $4,000, or 3.3%, deposit expenses 20 increased $10,000, or 7.8%, bank share tax expenses decreased $2,000, or 1.3%, directors' fees decreased $11,000, or 15.3%, and all other expenses increased $13,000, or 3.8%. The Company actively engages in leasing space at its headquarters that it has available. Income from leases from third parties for the three months ended June 30, 2002 and 2001 was $181,000 and $162,000, respectively. Income from leases from third parties for the six months ended June 30, 2002 and 2001 was $353,000 and $301,000, respectively. Such leasing income reduces the Company's reported occupancy expense. Management offers no assurance that lease income from third parties will remain at this level or that occupancy expenses may not increase in the future due to, among other factors, utility costs and repair and maintenance expenses. Income Taxes For the three months ended June 30, 2002 and June 30, 2001, the Company incurred income tax expense of $297,000 and $264,000, respectively. The Company's effective tax rate amounted to 33.3% and 36.8% during the first three months ended June 30, 2002 and 2001, respectively. The difference between the effective rate and the statutory tax rate is primarily related to variances in the items that are either non-taxable or non-deductible. For the six months ended June 30, 2002 and June 30, 2001, the Company incurred income tax expense of $609,000 and $635,000, respectively. The Company's effective tax rate amounted to 35.2% and 36.0% during the six months ended June 30, 2002 and 2001, respectively. The difference between the effective rate and the statutory tax rate is primarily related to variances in the items that are either non-taxable or non-deductible. LIQUIDITY RESOURCES The Company's primary liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. Excess liquidity includes the Company's securities available for sale portfolio. The Company's primary sources of funds are deposits, borrowings, proceeds from sale of stock, and amortization, prepayments and maturities from its loan portfolio and its securities held to maturity portfolio, and other funds provided from operations. While scheduled payments from the amortization of loans and securities and maturing investment securities are relatively predictable sources of funds, deposit flows, loan prepayments, and securities prepayments are greatly influenced by general interest rates, economic conditions and competition. Under current agreements, the Company has the ability to borrow up to approximately $129.8 million from the FHLB through its subsidiary bank, with $62.4 million currently available for additional borrowing. Additionally, using other investments as collateral, the subsidiary bank could borrow an additional $29.7 million. Altogether, these sources represent $92.1 million additional cash liquidity which could be obtained through additional borrowings at June 30, 2002. Liquidity management is both a daily and long-term function of business management. The Company uses its primary liquidity to meet its ongoing commitments, to pay maturing certificates of deposit and deposit withdrawals, and to fund loan commitments. The Company's excess liquidity and borrowing capacity provide added readiness to meet ongoing commitments and growth. At June 30, 2002, the total approved commitments to extend credit amounted to $32.6 million, including undisbursed funds related to construction loans of $8.5 million, unused approved lines of credit of $15.6 million, approved loan commitments of $8.4 million and standby letters of credit of $58,000. Certificates of deposit with a remaining maturity of one year or less at the same date totaled $80.3 million. Management believes that a significant portion of maturing deposits will 21 remain with the Company. The Company anticipates it will continue to have sufficient funds together with available borrowings to meet its current commitments. CAPITAL RESOURCES The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2002, that the Company and the Bank met all capital adequacy requirements to which they are subject. The Company's and the Bank's actual capital amounts and ratios as of June 30, 2002 are presented in the table below: Minumum to be Minimum Well Capitalized Under Capital Prompt Corrective (Dollars in Thousands) Actual Requirement Action Provisions --------------------- ----------------- ------------------------ June 30, 2002 Amount Ratio Amount Ratio Amount Ratio ---------------------------------------- -------- ------- ------- ------ --------- ------- Total Capital to Risk Weighted Assets: Acadiana Bancshares, Inc. $ 29,665 15.9% $14,914 8.0% N/A N/A LBA Savings Bank 26,720 14.7% 14,544 8.0% $ 18,179 10.0% Tier 1 Capital to Risk Weighted Assets: Acadiana Bancshares, Inc. 27,369 14.7% 7,457 4.0% N/A N/A LBA Savings Bank 24,424 13.4% 7,272 4.0% 10,908 6.0% Tier 1 Capital to Average Assets: Acadiana Bancshares, Inc. 27,369 8.8% 12,455 4.0% N/A N/A LBA Savings Bank 24,424 8.0% 12,199 4.0% 15,249 5.0%

IMPACT OF INFLATION AND CHANGING PRICES The preparation of financial statements in accordance with generally accepted accounting principles generally require the measurement of financial position and operation results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company's assets and liabilities are monetary in nature. Consequently, interest rates generally have a more significant impact on the Company's performance than does the effect of inflation. Interest rates do not necessarily move in 22 the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Item 3. Quantitative and Qualitative Disclosures about Market Risk MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Company's actions with respect to interest rate risk and its asset/liability gap management are taken under guidance of the Finance Committee of the Board of Directors of the Bank, which is composed of Messrs. Beacham, DeJean and Saloom, and the Asset/Liability Management Committee ("ALCO"), which is composed of six officers of the Bank. The Finance Committee meets jointly with the ALCO, quarterly to set interest rate risk targets and review the Company's current composition of assets and liabilities in light of the prevailing interest rate environment. The committee assesses its interest rate risk strategy quarterly, which is then reviewed by the full Board of Directors. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the ALCO. In its capacity, the ALCO develops guidelines and strategies affecting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate levels and trends. The Company's 2001 Annual Report has further information relating to market risk. The Company does not believe that its exposure to market risks has changed materially since December 31, 2001. INTEREST RATE RISK Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and interest expense streams associated with the Company's financial instruments also change, thereby affecting net interest income ("NII"), which is the primary component of the Company's earnings. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest-rate spread that can be sustained during fluctuations of interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities that either reprice or mature within a given period. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets, in a given period. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income. During a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. The Company's 2001 Annual Report to Stockholders has further information relating to interest rate risk. The Company does not believe that its exposure to interest rate risk has changed materially since December 31, 2001. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. On April 24, 2002 the Company held the annual meeting of stockholders for the following purposes: (1) to elect two directors for a three-year term expiring in 2005, and until their successors are elected and qualified (Gerald "Jerry" G. Reaux, Jr. and John H. DeJean); (2) to adopt the Acadiana Bancshares, Inc. 2002 Stock Option Plan; and (3) to ratify the appointment by the Board of Directors of Castaing, Hussey & Lolan, LLC as the Company's independent auditors for the fiscal year ending December 31, 2002. Votes were cast as follows: ----------------------------------------------------------------------- Acadiana Bancshares, Inc. Castaing, Gerald G. John H. 2002 Stock Hussey & Reaux, Jr. DeJean Option Plan Lolan, LLC ----------------------------------------------------------------------- For 965,272 965,272 546,873 965,847 ----------------------------------------------------------------------- Against 124,809 1,000 ----------------------------------------------------------------------- Abstain 15,826 125 ----------------------------------------------------------------------- Withheld 1,700 1,700 ----------------------------------------------------------------------- Total Votes Cast 966,972 966,972 687,508 966,972 ----------------------------------------------------------------------- Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. 3.1* Articles of Incorporation of Acadiana Bancshares, Inc. 3.2* Bylaws of Acadiana Bancshares, Inc. 4.0* Form of Stock Certificate of Acadiana Bancshares, Inc. 10.1** Stock Option Plan 10.2** 1996 Recognition and Retention Plan and Trust Agreement for Employees and Non Employee Directors 10.3*** Employment Agreement between LBA Savings Bank and Gerald G. Reaux, Jr. 24 10.4* Form of Severance Agreement between Acadiana Bancshares, Inc., LBA Savings Bank and Lawrence Gankendorff, James J. Montelaro, Gregory King, Mary Anne Bertrand, Wayne Bares, Emile E. Soulier, III and Thomas F. Debaillon. 10.5****2002 Stock Option Plan. 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*) Incorporated herein by reference from the Registration Statement on Form S-1 (Registration No. 333-1396) filed by the Registrant with the SEC on February 15, 1996, as subsequently amended. (**) Incorporated herein by reference from the definitive proxy statement, dated December 16, 1996, filed by the Registrant with the SEC (Commission File No. 1-14364). (***)Incorporated herein by reference from the Annual Report on Form 10-K (File No. 1-14364) filed by the Registrant with the SEC on March 31, 1997. (****)Incorporated by reference to the definitive proxy statement, dated March 22, 2002, filed by the Registrant with the SEC (Commission File No. 1-14364). b) No Current Reports on Form 8-K were filed during the quarter. 25 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACADIANA BANCSHARES, INC. Date: August 14, 2002 By: /s/ Gerald G. Reaux, Jr. ------------------------------------------------ Gerald G. Reaux, Jr., Chairman, President and Chief Executive Officer Date: August 14, 2002 By: /s/ Emile E. Soulier, III ------------------------------------------------ Emile E. Soulier, III, Senior Vice-President and Chief Financial Officer 26

ACADIANA BANCSHARES INC /LA 10-Q